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CASE LAWS
2016-TIOL-1753-HC-MUM-CUS + Story
SANDOZ PVT LTD Vs UoI: BOMBAY HIGH COURT (Dated: August 01, 2016)
FTP - Once there was a clear stipulation in the policy itself, then, all that the circular 16/(RE-2012)/2009-14 dated 15 March 2013, does is to clarify this obvious position - If there was no obligation to pay duty, then, there is no question of claiming a refund – Petitions dismissed: High Court [para 40, 41, 42]
Petitions dismissed
Observations of High Court :
++ The respondents have rightly taken note of the provisions of the FTP and Handbook procedure Volume I 2009-2014 and the clarification issued by the DGFT. It is common ground that the interpretation and implementation of the policy by the DGFT is a permissible exercise and does not run counter to the scheme of the FTDR Act. After para 6.2 of the FTP is reproduced and particularly clause (b) thereof so also para 6.11 of the FTP which states that the EOU shall be entitled to exemption from payment of central excise duty on goods procured from DTA on goods manufactured in India, what the respondents have held is that the policy circular is merely clarificatory.
++ We have no hesitation in accepting this contention for the simple reason that para 6.2(b) and 6.11(c)(ii) of the FTP states that no refund of TED should be provided by Regional authorities of the DGFT or the office of the Development Commissioners because such supplies are ab initio exempted from payment of excise duty. The harmonious reading of this policy and particularly the paragraphs referred to above enabled the respondents to arrive at the conclusion that the refund was not admissible.
++ Once there was a clear stipulation in the policy itself, then, all that the circular does is to clarify this obvious position. If there was no obligation to pay duty, then, there is no question of claiming a refund in the manner done. If this is what has been held and appears to be the essential finding, then, that is not in any manner contrary to the mandate of the provisions and particularly of section 5 of the FTDR Act.
++ This is not a case where anything is being stated and for the first time so as to term it as an amendment to the policy and, therefore, would apply prospectively. Insofar as the subject issue is concerned, all that the respondents have done is to clarify that para 8.3(c) and para 6.2(b) and 6.11(c)(ii) of the FTP read harmoniously and together imply that no refund on supplies under para 8.3 is admissible. When there is an exemption, then, this refund claim was rightly disallowed.
++ Though in the past such claims have been granted does not mean that the practice or the past orders should govern the issue necessarily. When the petitioners themselves were aware of a policy circular and sought to urge that it would not be governing the controversy and for the period for which refund is claimed, then, it is clear that they were required to overcome the said stipulations and the circular itself.
2016-TIOL-1766-HC-MUM-VAT
MAHYCO MONSANTO BIOTECH INDIA PVT LTD Vs UoI: BOMBAY HIGH COURT (Dated: August 11, 2016)
Maharashtra VAT Act, 2002 - Sections 2(24), 6 & 30(1).
Keywords - deemed sale - franchise agreement - non exclusive license - permissive use - sub licensees - service - transfer of right to use goods - trait fees & terretorial jurisdiction.
Whether an agreement for divesting of hybrid seeds alongwith the technology embedded in it, to the seed companies, would amount to a "deemed sale" in the nature of "transfer of right to use goods" under clause (b)(iv) of the Explanation to Section 2(24) of the MVAT Act r/w Article 366(29A)(d) and Entry 54 List II of the Constitution - YES: HC
Whether such transfer of technology embedded in the seeds, could be treated as "permissive use", only if at the end of the period for which the use was granted, the seeds would have been returned to the transferor - YES: HC
Whether the characterstic of such seeds would affect its taxability, in case what is being taxed is not the seed itself but the license that transfers a right to use the seed - NO: HC
Whether the authorities under the State Act is permitted to levy a sales tax on a transaction which already attracts service tax - NO: HC
Whether a franchise agreement is taxable to only service tax, if under the said agreement the right of the franchisee to display the trademark comes to an end with the completion of the specified period of such agreement - YES: HC
Whether a franchise agreement which is effectively nothing more than a mere permissive use, can be made liable to VAT - NO: HC
The assessee i.e., Monsanto India, is a joint venture company of Monsanto Investment India Private Limited (MIIPL) and Maharashtra Hybrid Seeds Co. The Monsanto India develops and commercializes insect-resistant hybrid cottonseeds using a proprietary "Bollgard technology", one that is licensed to Monsanto India by Monsanto USA through its wholly-owned subsidiary, Monsanto Holdings Private Limited (MHPL). This technology is further sub-licensed by Monsanto India to various seed companies on a non-exclusive and nontransferable basis to use, test, produce and sell genetically modified hybrid cotton planting seeds. In return for this technology, Monsanto India receives trait fees based on the number of packets of seeds sold by the sub-licensees. The Monsanto India under present petition had challenged Entry 39 of Schedule C to the Maharashtra VAT Act, 2002, the definitions u/s 65(105)(zzr), 65(55a) and 65(55b) of the Finance Act, 1994; and sub-clause (c) of Section 66E of the Finance Act, 1994. The challenge was on two grounds, namely, i) that these were ultra vires to Articles 14, 19(1)(g) and 265 of the Constitution of India; & ii) that the exercise of power of the Union of India under Entry 54 in List II of the Constitution was ultra vires and it encroaches on the power vested exclusively in the Union under Entry 97 in List I.
Another assessee i.e., Jagannath Rao is a full time director of Subway Systems Pvt Ltd. This entity operates and franchises sandwich shops in India. Ravindra Pal Singh is an executive of the outsourced agency that maintains Subway’s account books. During the subject year, Subway was granted a non-exclusive sub-license by Subway International B.V. (SIBV), a Dutch limited liability corporation to establish, operate and franchise others to operate SUBWAY-branded restaurants in India. This non-exclusive license was granted to SIBV itself by Subway Systems International Ansalt, which in turn was granted such a license by Doctor’s Associates Inc., an entity that owns the proprietary system for setting up and operating these restaurants. These restaurants serve sandwiches and salads under the service mark SUBWAY. The agreement included not only the trade mark SUBWAY, but also associated confidential information and goodwill, such as policies, forms, recipes, trade secrets and the like. Typically, Subway enters into franchise agreements with third parties, under which it provides specified services to the franchisee. In return, the franchisee undertakes to carry on the business of operating sandwich shops in Subway’s name. The agreement only provided for a very limited representational or display right, and the franchisee could not transfer or assign these exclusive rights to any third person. Subway also reserves the right to compete with these franchisees in the agreement. Under this agreement, Subway receives two kinds of consideration, one being a one-time franchisee fee which is paid when the agreement was signed; and the second was a royalty fee paid weekly by the franchisee on the basis of its weekly turnover. Since September 2003, Subway had been paying service tax to the Union of India on the consideration received by it from the franchisees. The ACST took the view that this consideration should be subject to VAT and accordingly, Subway was issued several notices asking it to show cause why the consideration it received should not be assessed to sales tax, and why no penalty should be imposed on the whole time director and the executive of the agency that maintained Subway’s books of accounts. After rejecting the submissions of assessee, the ACST passed an ex parte assessment order, including interest and penalties of Rs.17,98,988/-.
Having heard the parties, the High Court held that,
Divesting of seeds embedded with Monsanto technology
++ the principal question of dispute is whether the agreements whereby 'Monsanto technology' is granted by the assessee to the seed companies amounts to mere 'permissive use' and, therefore, a service u/s 65(B)(44) of Finance Act, 1994 r/w Entry 97 List I of the Constitution, or whether it is a "deemed sale" in the nature of "transfer of right to use goods" under clause (b)(iv) of the Explanation to Section 2(24) of the MVAT Act r/w Article 366(29A)(d) and Entry 54 List II of the Constitution. It is true that the essence of a 'transfer' is the divesting of a right or goods from transferor and the investing of the same in the transferee, and this is what Salmond on Jurisprudence and Corpus Juris Secundum both say. In our opinion, the seeds embedded with the technology are, in fact, transferred. Monsanto India is divested of that portion of the technology embedded in these fifty seeds and these are fully vested in the sub-licensee. The assessee's counsel is not correct when he says that the effective control of the ‘goods’ is with Monsanto India. The effective control over the seeds, and, therefore that portion of the technology that is embedded in the seeds, is entirely with the sub-licensee. That sublicensee is not bound to use the seeds and the embedded technology in accordance with Monsanto India’s wishes. Monsanto India cannot further dictate to the sub-licensee what he or it may do with these technology-infused seeds;
++ the subject of the levy is not the technology nor the medium. It is the license; and the terms of that license are determinative. Where a license is purchased, it is still a sale, although what the user has ‘purchased’ is the right to use the software. Every license has a unique key and every sale is therefore uniquely identified. The purchase is therefore a transfer of the right to use that particular, identified software. Monsanto India’s case is no different. Its sub-licensee do not acquire any proprietory intellectual property rights over the Bollard Technology; Monsanto India’s and its parents’ patents, copyright, marks and other intellectual property rights are preserved intact, unaffected by the sub-licensing. But the identified technology, the one infused in the fifty seeds given to the sub-licensee, is for the sub-licensee to use as he wishes. Since the seeds in question are purely donor seeds, the question of the scope of the entry relating to seeds, the Assessee's counsel submits, does not arise. He submits that even if cotton seeds are considered to be oil seeds, Entry 68 of Schedule C of the MVAT Act provides that these oil seeds would be liable to pay a rate of only 5%. Therefore, even in the worst-case scenario, Monsanto India is not liable to pay more than 5% sales tax. Given our previous discussion, we do not think it is necessary to go into this question at all, for what is being taxed is not the seed itself but the license that transfers a right to use the seed. Therefore, in our opinion, it makes no difference if the seeds are coker seeds or oil seeds;
Subway's Franchise agreement
++ the Revenue's argument that the eligibility of VAT is to be determined by the State, and therefore it could levy a sales tax on a transaction which already attracts service tax, cannot be accepted. The Subway’s transaction cannot be split into two distinct or severable components. The State therefore cannot tax the entire transaction as a sale either. This is well-settled law, and if a State was to be permitted to tax the whole transaction, it would amount to nothing less than entrenching upon the powers exclusively available to the Centre under the Union List. The agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. It is, therefore, subject only to service tax. In our opinion, the fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway’s case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark ‘Subway’ and its trade dress, and all other permissions would also end. This is what sets this agreement apart from the case of Monsanto and its sublicensee. There, the seed companies could do as they pleased with the seeds; they could alienate or even destroy them. In Subway’s case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement. We believe that there is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. For all the reasons in law and fact that the sub-licensing of technology in Monsanto is held to be a transfer of right to use, this franchising agreement must be held to be permissive use;
++ this Court however does not suggest that every franchise agreement will necessarily fall outside the purview of the amended MVAT Act. There is conceivably a class of franchise agreements that would have all the incidents of a 'sale' or a 'deemed sale', and a mere inclusion of ‘franchises’ under the MVAT Act would not automatically make all franchise agreements liable to sales tax. If, in a given case, a franchise agreement is effectively nothing more than a mere permissive use, it cannot be made liable to VAT. If the franchise agreement is not liable to sales tax, then it is not liable to sales tax by any state agency anywhere, irrespective of location. Sales tax is under the purview of the State List, while service tax comes under the ambit of the Central List. Since this transaction is held to be a service, the service tax levied will be assessed and payable to the Central Government. Therefore, a detailed discussion of situs is unnecessary.
Petition disposed of
2016-TIOL-1765-HC-P&H-CX
CCE Vs DEE DEVELOPMENT ENGINEERS PVT LTD: PUNJAB & HARYANA HIGH COURT (Dated: August 09, 2016)
CX - Tribunal while allowing appeal with consequential relief held that supplies made to SEZ developers are not hit by the provisions of rule 6 of CCR, 2004 and the benefit of Notfn. 50/2008-CE(NT) dated 31.12.2008 is to be extended with retrospective effect - Revenue in appeal before High Court.? Held: Identical issue was gone into by three different High Courts in M/s Steel Authority of India Ltd., Bhilai Steel Plant, Bhilai - 2013-TIOL-384-HC-Chattisgarh-CX, which was followed in M/s Sujana Metal Products Ltd., - 2013-TIOL-1128-HC-AP-ST and further followed in Fosroc Chemicals (India) Pvt. Ltd. - 2014-TIOL-1609-HC-KAR-CX, and the issue was decided against the revenue and in favour of the assessees -? High Court deems it appropriate to follow the same to maintain consistency as the Central Excise Act is a Central Statute - Revenue appeal dismissed: High Court [para 2, 3]
Appeal dismissed
2016-TIOL-1764-HC-ALL-CX
BALRAMPUR CHINI MILLS LTD Vs CCE: ALLAHABAD HIGH COURT (Dated: July 19, 2016)
CX – Remission of duty in respect of loss of molasses due to accident. Held: In order to avoid duty payable under Rule 49 of Central Excise Rules, 1944, onus is on assessee to prove that accident occurred due to reasons beyond his control and he could not have avoided it - Tribunal has not committed any error of law in overlooking any statement as alleged since there was no document or statement which show that loss has occurred due to an accident - no reason to hold that assessee are not liable to pay any liability – Reference answered against the assessee: High Court [para 3]
Reference answered against assessee
